August 16, 2006 10:51 AM

Natural gas has been an enigma. After rallying to all-time highs at the end of 2005, natural gas futures dropped 66% by July 10, despite the continued bull market in crude oil. And while it rallied more than $3 per mBtu in July, it is not that price action that has analysts perplexed and led to the closure of energy based hedge fund Mother Rock LP, but the dramatic shift in the calendar and volatility spreads. The shift moved the Sept/Dec differential from under $1 to more than $3 from January to April.

Analysts point to weather anomalies such as last winter’s record warm temperatures and the increased severity of hurricanes for throwing off normal relationships.

“Recently the spread has been getting whacked,” says Alaron energy analyst Phil Flynn, adding, “There is a new dynamic in this market.”

Typically gas inventories build during summer months and drop during the winter heating season, but the reverse was true last year as inventories built up during the mild winter and recently dropped in July and August.

Fain Shaffer, president of Infinity Trading, says, “In the past, the big moves have been for a heating play, now it’s a hurricane play.”

The hurricane factor may account for the spread differential as the December contract faces the full affect of the hurricane season.

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